Question

In: Economics

What are the four components of a country’s current account of the balance of payments. Name...

What are the four components of a country’s current account of the balance of payments. Name and briefly describe what each component consists of. (4)

Solutions

Expert Solution

Current accounts refers to an account which records all the transactions relating to export and import of goods and services and unilateral transfers during a given period.

The main components of Current Account are-

1. Export and Import of Goods - A major part of transactions in foreign trade is in the form of export and import of goods(visible items). Payment for import of goods in written on the negative side(debit items) and receipt from exports is shown on the positive side(credit items).

2. Export and Import of Services - It includes a large variety of non-factor services(invisible items) sold and purchased by ghe residents of a country, to and from rest of the world. Payment are either received or made to the other countries for use of these services. Services are generally of three kinds - a. Shipping b. Banking c. Insurance. Payments for these services are recorded on the negative side and receipts on the positive side.

3. Unilateral Transfers - Unilateral transfers include gifts, donations, personal remittances and other 'one-way' transactions. These refer to those receipts and payments, which take place without any service in return. Receipt of unilateral transfers from rest of the world is shown on credit side and unilateral transfers to rest of the world on the debit side.

4. Income receipts and payments to and from abroad - It includes investment income in the form of interest, rents and profits.


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